2/20/12

This post goes over the economics of PPF construction and opportunity cost calculations, for more info on the theories behind this check out this post of PPFs and opportunity costs.

Summary:A PPF has increasing opportunity costs if the
opportunity cost of a good gets larger as more of it is produced (this punishes
specialization) and the PPF will be bowed out (a circle shape).A PPF has constant opportunity cost if the opportunity
cost of a good stays the same no matter how much of it is being produced so the
PPF will be a straight line (a triangle shape).Finally, a PPF has decreasing opportunity costs if the opportunity cost
of a good gets smaller as more of it (this promotes specialization) and the PPF
will be bowed in (like a crescent moon).

Given the following table, we need to find the opportunity cost of moving
from each point to another point, and construct the PPF.

Point

Computers (Y)

Leather Jacket (X)

Opportunity Cost of Computer

Opportunity Cost of Leather Jacket

A

12

0

.5 Leather J.

B

10

1

.5 Leather J.

2 Computers

C

8

2

.5 Leather J.

2 Computers

D

6

3

.5 Leather J.

2 Computers

E

4

4

.5 Leather J.

2 Computers

F

2

5

.5 Leather J.

2 Computers

G

0

6

2 Computers

Calculating the opportunity cost requires you to figure out
how much you are getting of a good, and dividing that number by how much you
are giving up of the other good.

What we give up/what we get.

For example, moving from point A to point B, we are getting
1 leather jacket, and giving up 2 computers, this means that the opportunity cost
of 1 leather jacket is 2 computers (2/1).Likewise, if we move from point B to point A, we are giving up 1 leather
jacket, and getting 2 more computers, so the opportunity cost of 2 computers is
.5 leather jackets (1/2).Note that the
two opportunity costs are inverses of each other.

You can see from the graph that the opportunity costs are
constant as we move along the various points of the PPF.If the opportunity costs were increasing,
then we would see the opportunity cost rise as we produced more and more of
that specific good.For example, the opportunity
cost of a leather jacket at point G would be higher than point B.

Finally, to graph this PPF, we just take the points as given
and plot them on a graph, then connect the lines to get a PPF.In this case, it is a linear PPF.